Czech government aims to cut deficit below 2% of GDP with savings, tax hikes

The Czech government will cut subsidies and lift taxes as part of plans to deflate state deficits and get the fiscal gap below 2% of gross domestic product in 2024, Finance Minister Zbynek Stanjura said on Thursday. The centre-right, five-party government unveiled a broad deficit-cutting plan worth 94 billion crowns ($4.43 billion) to rein in a budget gap that has soared since 2020.

The Czech government will cut subsidies and lift taxes as part of plans to deflate state deficits and get the fiscal gap below 2% of gross domestic product in 2024, Finance Minister Zbynek Stanjura said on Thursday. The centre-right, five-party government unveiled a broad deficit-cutting plan worth 94 billion crowns ($4.43 billion) to rein in a budget gap that has soared since 2020. The measures come alongside longer-term reforms to a creaking pension system that eats up a third of state expenditure.

After months of talks over a plan to cut the 2024 deficit - and facing new urgency with the 2023 budget shortfall growing at a record pace - the parties agreed measures this week. Stanjura said the package included savings worth 46 billion crowns ($2.17 billion) in 2024 through reductions in subsidies.

Excise tax hikes and a higher real estate tax are planned, along with raising the corporate tax rate to 21% from 19%, with the latter bringing 22 billion crowns in extra revenue in 2025 when it will be first collected. Under the pension reform, early retirement will become tougher, and the retirement age, now 65, will rise flexibly according to life expectancy for younger workers.

Labour Minister Marian Jurecka said the changes were needed given an ageing population which will see one working person per one retired person by 2050. "If we weren't able to step on the brake, the situation would get out of hand in several years and our children would suffer the consequences," Prime Minister Petr Fiala said at the government's more than two-hour presentation.

"Of course, the measures, the cuts, are unpleasant, they hurt. But we are sure that it will be an acceptable price." BACK TO EU RULES

Czech budgets have been battered since the COVID pandemic. The previous government also delivered a record income tax cut - which Fiala's party backed - and state debt at one point was growing at one of the fastest rates in the European Union. It stood at 44% of GDP last year, still half of EU averages but up from 30% in 2019.

Since Russia's invasion of Ukraine last year, defence spending has been rising to meet a NATO commitment of 2% of GDP by next year. Fiala's government has also had to help people hit by soaring energy prices, making his coalition's 2021 election promise to steady public finances more difficult. The government plans a deficit of 295 billion crowns in 2023. Last year the fiscal gap shrank to 3.6% of GDP from more than 5% in the previous two years.

Stanjura said the deficit would fall to 1.8% in 2024 and 1.2% in 2025, which would bring it under the European Union's 3% ceiling for the first time since 2019. With inflation still in double digits, central bank governor Ales Michl warned last week another interest rate hike might be needed without a credible fiscal package. ($1 = 21.2420 Czech crowns)